1. Why is growth in GDP per capita a better indicator of economic welfare than overall growth in GDP?
GDP per capita is a better indicator of economic welfare because it measured frequently, widely and consistently. Most countries provide information on GDP quarterly, allowing trends to be seen quickly. Some measures of GDP are available for almost every country worldwide, allowing inter-country comparisons. The technical definition of GDP is relatively consistent among countries. But for overall growth, people must face motivations that encourage them to pursue economic activities.
2. Illustrate the conflict between equity and efficiency in economics
Efficiency relates to the size of society's economic pie, while equity relates to how that pie is divided. For example, a progressive income tax system requires people who earn more money to pay higher tax rates to support government operations. It may strive to achieve greater economic equity, but at a cost of reduced efficiency. Higher tax rates on high incomes reduce the reward for working hard and may result in people working and producing less.
3. Why does productivity need to be taken into account when measuring wage costs?
In general, productivity growth leads to growth in average output and hence growth in business income. Any increase in income is distributed by payments to the factors of production, wages and capital. If the productivity increases, the revenue will increase and hence employers will pay more wages. In contrast, if the productivity not increases, but the wages also increases, there will be a problem for employers.
4. Is unemployment the result of increased labour supply? Why? Why not? Explain
It depends. According to the classical theory, labour supply increases because of the high wages. In addition, employers unwilling or cannot afford the high wages and hence the demand of labour decreases. Therefore unemployment rate will increase. Under the new classical theory and natural...